Pakistani administrations have become adept at presenting an annual budget to parliament with the required detailed documents (with respect to both projected expenditure and revenue), printed at considerable cost to the exchequer, which, by and large, is rendered redundant on 1 July, the first day of the start of new fiscal year.
It is the usual practice to announce some refinements/amendments to the finance bill after taking account of the recommendations of the parliamentary finance committee, though taking on board any recommendation is now linked to ties, if any, with the proposer’s political affiliation rather than on the merits/demerits of a proposal. Sadly, parliamentary committees traditionally take no notice of the budgeted expenditure.
What is even more disturbing about the budget 2022-23 is that on 24 June during his budget winding up speech Miftah Ismail made two major amendments to the finance bill that he had presented on 10 June – amendments sourced to the International Monetary Fund’s (IMF) ultimatum to take them on board or else face suspension/delay in reaching the seventh review staff level agreement of the Extended Fund Facility (EFF) programme.
First, a 10 percent supertax presented as a tax on the elite which the Federal Board of Revenue (FBR) projects would generate 200 billion rupees though independent sources claim that if applied across the board effectively it would generate double that amount. This may perhaps have been levied after the Fund expressed its legitimate reservations at the projected additional one trillion rupee FBR collection in 2022-23 budget — 65 percent sourced to a growth rate of 4.9 percent (unlikely with a contractionary monetary and fiscal policies in place today), 26 percent to income tax (with around 76 billion rupees unlikely to be realized due to almost certain litigation).
To score political points the Finance Minister was at pains to say ad nauseum that the Prime Minister and his own extremely wealthy entrepreneurial family would pay the supertax and thereby contribute to meet the budget deficit of the outgoing year for which Imran Khan was held responsible, though the impact of the supertax on exports, domestic prices and employment were disregarded. The Fund’s approval for this tax is manifest in the staff level agreement press release dated 13 July, early morning hours of 14 July Pakistan time, which noted that the budget underpinned “broad revenue mobilisation efforts focused particularly on higher income taxpayers.”
And secondly, a 2.5 percent tax on those earning between 50,000 to 100,000 rupees and a whopping 12.5 percent on those earning from 100,000 to 200,000 per month — the two income groups that were already the hardest hit due to the IMF-mandated prior seventh/eighth review conditions envisaging higher utility rates, and contractionary policies with an inbuilt impact on output and employment.
The fault, Ismail said for the record, is his own failure to convince the IMF not to impose personal income tax on those earning between 50,000 and 2 lakh rupees per month. This admission in the wake of Ismail agreeing with the Fund in Washington DC to end the 28 February relief package while failing to convince the cabinet on his return, which later approved it after the intervention of the coalition leadership, and his upping the taxes in his winding up speech instead of making appropriate inclusions in the original finance bill must have sent the message to the Fund that the current Pakistani leadership understands only the take it or leave it option.
The question is whether the gains made in raising FBR revenue in 2021-22, a refrain constantly cited by the Pakistan Tehreek-e-Insaf (PTI), are legitimate. Two observations are relevant. First, a higher tax to GDP ratio allows an administration to reduce its reliance on borrowing and therefore is a very critical macroeconomic indicator.
Pakistan continues to suffer from a number of factors that lead to a low tax to GDP ratio that include a narrow income tax base (though that has been considerably expanded in the 2022-23 budget due to the revisions in the personal income tax), agriculture responsible for nearly 20 percent of GDP (higher by at least 5 percentage points if its contribution as an input for manufacturing is taken into account) contributes a negligible amount to taxes, tax evasion and/or avoidance are rampant, poor documentation (with a large parallel informal economy) and exemptions/concessions under the guise of incentives and smuggling across our large porous border.
The seventh/eight review staff level agreement notes that the government has agreed to undertake a comprehensive review of anti-corruption institutions (including NAB) to enhance their effectiveness in investigating and prosecuting corruption cases. While PTI stalwarts are publicly taking the stance that this reflects the Fund’s concerns over the recent amendments to the NAB Act yet a more informed observation would have concluded that the time period of any such study would necessarily focus on the previous three to four years (with the PTI in government from August 2018 to early April 2022) during which time several prominent opposition leaders were accused of corruption and incarcerated though none were convicted with all out on bail while members of the PTI, including Imran Khan, were all exonerated.
In addition, the study may take well over six months or so which would imply close to the end of the rescheduled date of EFF completion (June 2023).
And secondly, there are discrepancies between the IMF sixth review document data citing General Government Budget Data and the Economic Survey 2021-22 with FBR tax to GDP ratio cited at 11.7 percent in 2017-18 by the former (against 9.8 percent as per Economic Survey 2021-22), 10.1 percent in 2018/19 (8.7 percent in Survey), 9.6 percent in 2019/20 (against 8.7 percent in Survey), 11 percent in 2020/21 (8.5 percent) and in the year past 12.1 percent though data released by the Business Recorder suggests a low of 8.5 percent (which has not been challenged). Next fiscal year the target is budgeted at 9.5 percent though it is unclear whether the additional revenue measures in the finance bill have been included.
The staff-level agreement extends its support to the budget which it stipulates is aimed at “reducing the government’s large borrowing needs by targeting an underlying primary surplus of 0.4 percent of GDP, underpinned by current spending restraint…development spending to be protected and fiscal space created for expanding social support programme”. This implies 36 to 37 billion dollars of external borrowing as per the sixth review documents (with Miftah Ismail upping this to 42 billion dollars during one of his too frequent interactions with the media), no indication yet that the government has reduced current spending though if past precedence is anything to go by development spending will almost certainly be slashed from the budgeted unrealistically high 808 billion rupees, and fiscal space, subject to a significant decline in the international price of oil and products, would be diverted towards subsidies/Benazir Income Support Programme especially as elections near.
To conclude, the staff-level agreement (SLA) urges steadfast implementation of the outlined policies but warns that additional measures may be necessary to meet programme objectives, given the elevated uncertainty in the global economy and financial markets. The government’s compliance however would depend not only on its ability to position itself favourably with the altered geopolitical considerations (which were held as a debilitating factor in negotiations with the Fund by Shaukat Tarin) indicated by Shehbaz Sharif giving credit for the seventh/eighth review success to Foreign Minister Bilawal Bhutto Zardari as well as the Finance Minister and domestic economic and political considerations at the time.
Copyright Business Recorder, 2022
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